Managing Indirect Tax Compliance in Accounts Payable

Delaney McDonald
December 26, 2019

Tax compliance is not just an issue that accounts receivable (AR) handles. With regulatory changes becoming more and more complex, the responsibility also lies with accounts payable (AP) to minimize a company’s risk.

AP plays an important role in indirect tax compliance. States and the IRS continue to digitize efforts with tax collection and enforcement, and sales and use tax is often low-hanging fruit for auditors. With more room for potential errors, regulators will be looking increasingly at how much companies pay in sales tax.

The ruling in the Supreme Court case South Dakota v. Wayfair changed the standards for determining economic nexus. The question of physical presence has been replaced with the standard that states can collect sales tax from remote sellers with “substantial nexus” as long as it doesn’t create an “undue burden” to that remote seller. This makes it increasingly complicated for suppliers working with remote sellers to determine the correct taxation on purchased items. With new economic nexus standards, sellers need to determine whether they are complying with new mandates, while purchasers need to make sure sellers are determining correctly. 

Catching indirect tax discrepancies in the AP department

Trading partners must determine the right taxing jurisdictions and apply the right tax rate for every item in the supply chain. If a formal invoice has issues in the supplier’s systems, the best the buyer can do is catch the supplier’s determination errors in the AP approval process as early as possible.

If an error is found, the invoice with the incorrect rate and the associated data must then be returned. It should be returned with the suggested changes immediately upon receipt of that invoice into the AP approval workflow, rather than later when all business-related approvals have already happened—saving time and avoiding unnecessary business operations.

Having a solution in place that quickly catches and corrects any errors early in the workflow can save significant time, money and resources within the supply chain.

Automate indirect tax determination to mitigate AP risk 

With the continuing digitization of corporate procurement processes, an automated solution can catch errors that would otherwise be left uncorrected. With organizations often adapting new AP systems as needed, this multiplicity can also make the task of finding and fixing supplier errors exponentially more difficult. Unlike a centralized solution, multiple systems don’t always communicate with one another, creating an opportunity for mistakes. 

Buyers do not always trust their suppliers to know how to create invoices that are fully compliant in form and content. Indirect tax automation can reduce error rates that are associated with manual controls and keep up with the acceleration of business processes in AP automation. An automated solution mitigates issues by integrating legacy systems— a complex yet essential part of maintaining tax compliance and reducing risk.

Download the e-book, “Accounts Payable Tax Compliance: 5 Challenges SAP Shops Must Overcome,” and successfully manage supplier errors and AP system diversification.

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Delaney McDonald

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